Sunday, March 2, 2014

The privatization dogma.

It is a pretty universally
accepted dogma that privatization of government functions saves
money. Unfortunately that dogma is false. Here is one example:

Here is an interesting
problem encountered by the Federal
Government.
The Feds
outsource a significant proportion of their checks
on new employees to a
private firm. A private
firm investigates a job applicant's previous
employment, criminal records, trustworthiness in financial
transactions, etc., instead
of the Federal Government itself..

The argument in favor of this
outsourcing is simply that private companies are competing with other
private companies for the job of vetting the applications of new
government employees. As a result of this competition, the private
companies are likely to work harder for less money than the
government agency might have done. The leaders of the private company
have their eye on the bottom line. They must control costs in order
to compete successfully with other businesses applying for the same
job. In order to control costs, their employees must be exceptionally
productive. Stated in plain English, private companies must drive
their employees to work hard for as little money as possible. The
leadership of a government agency, on the other hand, is not under
those kinds of competitive pressures. They are more likely to treat
their employees better because it is in their interest to have loyal
and content people working for them.

Competition will increase
productivity and save money. That is the outsourcing story.

This morning's report, however,
suggests that often private companies meet their profit goals not by
increasing their employees' productivity but by submitting shoddy
work. It turns out that the company that is vetting a large number of
employee records in
Washington, DC has, for
years, submitted reports based on incomplete or even nonexistent
investigations.

Notice what happened here. The
government sends its job applicants' records to a private company.
After a while some government employees begin to be suspicious of the
investigative reports they are receiving, and start their own
investigations. We now have both a private contractor and
a government agency doing the investigating job. Quite obviously that
is horrendously inefficient. Privatization has struck out.

Privatization is by no means
always more efficient than jobs being done in-house in the
government.

But there is more to be said.
The private companies can make money only if they lower their costs.
A favorite way of lowering costs for businesses is to cut wages of
their employees or to cut the number of employees and increase the
workload of those remaining. Both will increase the number of
citizens seeking, for instance, unemployment benefits, or perhaps
medical care for stress and overwork. If we do not focus our
consideration of privatization excessively narrowly, we can see that
the supposed savings from privatization are going to be, in many
cases, illusory.

It has become a dogma in many
circles that government outsourcing is more efficient and saves
money. Like many dogmas, this one is very often false.